There is so much misinformation (and misunderstanding) around gift taxes, that we thought we would take a few moments and try to straighten out the confusion. Let’s start at the end: if you live in Arizona, and are not fabulously wealthy, you probably don’t actually care very much about gift taxes. Now let us explain why.

Arizona doesn’t assess any gift tax, estate tax or inheritance tax, so those of us living in The Valentine State only have to understand federal estate and gift tax systems — unless, of course, we own property in one of the states that does impose a tax on such transfers. Meanwhile, a basic understanding of the federal gift tax is practically embedded in our DNA: you can make a gift of up to $14,000 per year, but anything over that is prohibited.

The problem with that basic understanding is that it is wrong. The magical $14,000 figure is just the number that Congress has set as being too small to even bother thinking about. Nonetheless, it has a strong hold on the public imagination — even though the number has only been set at $14,000 since 2013. The “don’t even think about it” number was $3,000 for four decades before rising to $10,000 in 1982; it started increasing in $1,000 increments in 2002 and will probably rise to $15,000 within the next couple of years.

In calculating whether you have made gifts of over $14,000, by the way, the federal government gives you three important additional benefits:

The $14,000 figure applies to gifts to each person, not the total amount of gifts in a year. Do you have three children you want to make gifts to? No problem. You can give each of them $14,000 this year, for a total of $42,000, without having reached the threshold.

Are you married? It’s simple to double the numbers — even if you (or your spouse) are actually making the full amount of the gift. A married couple can give away $28,000 without having to do anything more (though if all the money comes from one spouse there is one more step required — more about that later).

Will the gifts be used for medical or educational expenses? The lid just got taken off. So long as you make your gifts by paying directly to the college, or hospital, or other provider, there is no $14,000 limit. You can pay your favorite granddaughter’s tuition and books directly, and still give her another $14,000 (double that if you’re married) without having to do another thing.

Does all that mean you are generally limited to giving $14,000 (each) to each recipient? No. That’s just the level below which you don’t have to do anything else but sign a nice card and make a notation in your check register. Want to make a $50,000 gift to your son, or your daughter, or your mailman’s nephew? No problem — you’re just going to have to file a gift tax return.

That sounds scary, but it’s really not. You won’t actually pay any gift tax unless the total amount you give away (over and above the $14,000 + tuition + medical expenses each year) exceeds $5.43 million dollars in your lifetime. And even that number is going up each year.

The bottom line: if you live in Arizona, don’t own property in a state that imposes a gift tax, and are worth less than about $5 million, you are simply going to be unable to pay a gift tax over your entire life, no matter how hard you try. That is also true, by the way, for estate taxes — you are going to have a very hard time incurring an estate tax in those facts, even if you want to do so.

So imagine that you want to make that $50,000 gift to one person (or two $50,000 gifts, or three) in 2015. How hard will it be to prepare and file the gift tax return? Not very. If you ask your tax preparer to do it for you, we predict that you will get charged a couple hundred dollars. You can almost certainly figure out how to file it yourself — just look for information about the federal Form 709. Things can get a little more complicated if you are giving away an interest in your business, or a fraction of a larger asset — you really will need to get professional help in such a case. But there’s no rule that says you simply can’t give away more than $14,000, or that you’ll pay any taxes or penalties if you go over that amount.

By the way, there’s a common misconception about other tax effects of gifts, too. There is no income tax deduction or adjustment for your gifts, and the recipient pays no gift tax on receipt of the gift. Of course, if you give away an income-producing asset the future income will be taxed to the new owner, but the only immediate tax effect of a gift in Arizona is the (almost nonexistent) federal gift tax.

Does all this mean we advocate making large gifts? Not necessarily. There are some secondary tax consequences of giving away larger assets — especially those that have appreciated in value while you owned them. Before making a gift of real property, or appreciated stocks, get good legal and tax advice. And there are plenty of non-tax reasons you might not want to give away a significant portion of your assets. But the federal gift tax shouldn’t be much of a disincentive for most people.

Mark Rubin

Your question is excellent — and the answer is surprisingly complicated.

A gift to a trust usually does not qualify for the $14,000 exclusion at all, which would mean that even a (for instance) $2,000 gift to a trust would require filing a gift tax return and reduction of the lifetime gift/estate tax exemption amount. There are some trusts that are set up to get around this difficulty; they are often called “Crummey” trusts (or, sometimes, irrevocable life insurance trusts).

A gift from a trust is a different matter. To illustrate, let’s imagine that I have set up a trust and placed $10,000 in it. The trust says that money can be distributed to me or to you. The trustee decides to make a $2,000 distribution to you. In those brief facts, establishing the trust was not a gift, but the distribution from the trust to you was a gift. And because the distribution to you was outright (not in further trust) it qualifies for the $14,000 exemption.

The moral: gift-giving using trusts is much more complicated than outright gifts. If you want to involve a trust, either as recipient or originator, make sure you talk with your estate planning lawyer and/or your tax accountant about the tax effects and the most efficient way to accomplish your goals.